Keep INVESTING Simple and Safe (KISS)
****Investment Philosophy, Strategy and various Valuation Methods****
The same forces that bring risk into investing in the stock market also make possible the large gains many investors enjoy. It’s true that the fluctuations in the market make for losses as well as gains but if you have a proven strategy and stick with it over the long term you will be a winner!****Warren Buffett: Rule No. 1 - Never lose money. Rule No. 2 - Never forget Rule No. 1.

High ROIC companies typically create more value by focusing on growth, while lower ROIC companies create more value by increasing ROIC.

Most often in mature companies, a low ROIC indicates

a flawed business model or

unattractive industry structure.

Earnings and cash flow are often correlated, but earnings don't tell the whole story of value creation, and focusing too much on earnings or earnings growth can lead to straying away from the value-creating path.

When ROIC is greater than the cost of capital, the relationship between growth and value is positive.

When ROIC is less than the cost of capital, the relationship between growth and value is negative.

When ROIC equals the cost of capital, the relationship between growth and value is zero.

With respect to countries, the core valuation principle is applicable, as made evident by the fact that U.S. companies trade at higher multiples than companies in other countries.

When comparing the effect of an increase in growth on a high ROIC company and a low ROIC company, a 1 % increase in growth will have a higher positive effect on the high ROIC company.

At high levels of ROIC, improving ROIC by increasing margins will create much more value than an equivalent ROIC increase by improving capital productivity.

Economic profit is the spread between the return on invested capital and the cost of capital times the amount of invested capital.

Investment rate = Growth / ROIC. If the growth of a company is 2% and the ROIC is 10%, its investment rate is 20%.

Data from both Europe and the United States found that companies that created the most shareholder value showed stronger employment growth.

In the past 30 years, there have been at least 6 financial crises that arose largely because companies and banks were financing illiquid assets with short-term debt.

Two activities that managers often use in an attempt to increase share price but that do not actually create value are

changes in capital structure (or financing of the firm) and

changes in accounting practices.

Maximising current share price is not equivalent to maximising long-term value because managers, who know more than shareholders about the firm's prospects, could slash crucial expenses to improve the stock price in the short term. Eventually, this will catch up to the firm, and the long term stock price will suffer.

During the Internet boom of the late 1990s, many firms lost sight of value creation principles by blindly getting bigger without maintaining a competitive advantage.

Wednesday, 14 June 2017

Beware of money scams

KUCHING: Time and again, we hear stories of friends or family members losing their life savings to con men, money scams or investment schemes promising elaborate returns of money.

The recent spate involving JJ Poor to Rich (JJPTR) is the latest in a string of such scams.

The scheme was thrust into the limelight after it claimed last month that its funds were siphoned off by ‘hackers’, resulting in the alleged loss of over US$50 million or RM217 million.

Investors had gone knocking on JJPTR’s doors when their 20 per cent monthly returns were not banked into their accounts last month.

On April 27, the company promised to refund all investment funds collected from its 31,000 members.

Its founder, Johnson Lee said this was made possible through the injection of capital by a new pool of foreign investors. He said refunds would be given to those who had just sent in their initial investment capital as well.

However, following the arrest of Lee and two of his key associates, everything came to a full stop as to its business operations as of May 16 this month. They were nabbed to facilitate investigations under Section 420 of the Penal Code for cheating.

Lee and his associates were arrested by federal police from the Commercial Crimes Investigation Department in Kuala Lumpur and Klang, with police confirming that five of the JJPTR bank accounts were also frozen.

After weeks of posting regular updates to reassure investors – including videos from Lee and presentations of a new plan – it was discovered that two JJPTR FB pages have now been deactivated, while other pages have not been updated since.

This case brought to light the issue Malaysia faces: why are its citizens so gullible to fall for such scams?

Lack of financial awareness

Financial experts cite a lack of financial awareness as a reason to why consumers continue to become victims.

iMoney Group chief executive officer and co-founder Lee Ching Wei told BizHive Weekly that it all boils down to lack of financial literacy and also herd mentality.

“Just because a lot of your friends or family members are investing in something doesn’t mean it is a sound investment,” he said in an interview.

“People tend to take shortcut in their investment –- they want to see huge returns without doing their due diligence. Unfortunately, that’s not how investment works.

“You may get lucky once or twice, but you won’t be lucky every time.”

On this note, Bank Negara Malaysia Governor Datuk Muhammad Ibrahim earlier this year affirmed that the pursuit of financial knowledge is a key economic imperative encouraged by the central bank.

“In today’s world, the ability and knowledge to save, invest and borrow are essential life skills, be it for individuals or businesses. Various efforts have been undertaken to improve financial inclusion in Malaysia.

“While results are promising, our efforts in achieving financial inclusion need to be further intensified.”

Ibrahim said there remain gaps in access to financing for certain segments of society.

Examples of the common issues faced by consumers include:

1. Misrepresentation or mis-selling of financial products, including incidences of product pushing;

2. Disputes on interest rates, loan balances or settlement of insurance claims due to the lack of transparency and understanding in relation to the terms and conditions, or contract ‘fine print’;

3. The lack of capacity and poor discipline in financial management, resulting in high household indebtedness.

4. The measures taken to overcome financial difficulties

“From the aspect of consumer protection, the Bank continues to devote efforts towards strengthening trustworthy and user-friendly redress mechanisms through the Financial Ombudsman Scheme, in addition to strengthening policies on market conduct of financial institutions to ensure fair dealings to consumers,” the governor continued.

“The Bank will also continue to accelerate initiatives on financial literacy to ensure that the financial advisory services provided by financial institutions, Laman Informasi Nasihat dan Khidmat (LINK) and the Credit Counselling and Debt Management Agency (AKPK) will continue to enhance the overall skills and knowledge in finance.

“Various initiatives are also being undertaken at the school and university level, as well as targeted and high-impact financial education programmes catered towards teenagers and adults by AKPK.”

Protecting consumers from traps

On the other end of the spectrum, government bodies and associations are consistently active in ensuring consumers are aware and well-prepared to avoid such traps.

Bank Negara Malaysia is proactive in protecting consumers in this regard. They periodically update a list of unauthorised companies and websites which are neither authorised nor approved under the relevant laws and regulations administered by BNM.

The latest list consists of 302 companies and is consistently updated, with the latest as early as this week.

BNM also said the list of companies and websites is not exhaustive and only serves as a guide to members of the public based on information and queries received by BNM.

“The list will be updated regularly for public’s reference,” it said.

Only financial institutions – that is banks, insurance companies and takaful operators as well as money changers, remittance service providers and currency wholesalers licensed by BNM under the relevant laws and regulations administered by BNM – are allowed to provide financial services in Malaysia.

Bank Negara on a website dedicated to fraud alerts warn consumers of several ways scammers search for victims.

“Financial scams target people of all backgrounds, ages and income levels. Fake lotteries, advance-fee frauds, get-rich-quick schemes and internet investment schemes are some of the favoured means of separating the unwary from their hard-earned savings.

“New varieties of these scams appear all the time. Despite the on-going awareness programmes by the relevant authorities and media coverage on the plight of victims of financial fraud, many are still knowingly or unknowingly falling prey to the activities of fraudsters.

“One of the best ways to combat this financial fraud is through prevention.”

Bank Negara Malaysia will continue to work with the relevant authorities and regulatory agencies towards clamping down on the activities of financial fraudsters and promote consumer awareness on illegal financial schemes.

The credit card conundrum

One cannot talk about money scams without covering credit cards, being an easy target for scammers.

And with Malaysia moving forward with contactless card updates, digital transactions and cashless withdrawals, it is pertinent to stay vigilant of scams of this manner.

According to iMoney’s chief Lee, there are about 9.3 million credit cards in circulation in Malaysia as of last year, with total transaction value amounting to a whopping RM118.5 billion.

Authorities are heightening security for credit and debit card usage in Malaysia by replacing the signature-based system with the personal identification number (PIN) verification.

Merchant payment terminals are also to be upgraded to accommodate the new security-enhanced system.

The migration to PIN from signature, which has started since last year, is part of a worldwide shift that has been implemented in Europe, Canada, Australia and New Zealand, with the Middle East also making the similar move.

Currently, all locally-issued credit cards have been replaced with those requiring personal identification numbers (PIN), according to BNM.

A total of 96.1 per cent of debit cards have been replaced while 99.8 per cent of point-of-sale terminals have been upgraded ahead of the July 1 deadline when signature authorisations will no longer be accepted.

“No extension will be granted,” BNM governor Datuk Muhammad Ibrahim told reporters while announcing Malaysia’s GDP for the first quarter of 2017 last week.

With just nearly 40 days left, Muhammad Ibrahim told the public to contact their issuing banks if they have not replaced their cards.

Contactless cards more secure than you think

As Malaysians move towards becoming a cashless society, consumers should opt for innovative payment methods which are convenient, speedy and secured, especially for purchases costing RM250 and under.

However, rumor mongers are active in spreading fear of using these cards, sharing horror stories of its misuse.

The Association of Banks in Malaysia (ABM) highlighted that contactless payment cards are “more secure than you think”, debunking several myths out there surrounding said cards.

“We wish to provide clarification regarding a video posting featuring “electronic pick-pocketing” of contactless payment cards which has caused come concerns over the security of such payment methods,” it said in a statement.

“ABM would like to highlight that the video, which we are given to understand, is several years old, was thought to have been made in the US where many contactless cards are/were still using magnetic stripes.

“While it is possible to build a scanner that can read certain information from payment cards using magnetic stripes, this technology will not work on cards which are using an Europay, MasterCard and Visa (EMV) chip.”

To note, EMV is a global specification for bank chip cards which prevents the cloning of cards. An EMV chip helps to reduce fraud as it is very difficult and costly to counterfeit.

When a transaction is performed by reading the EMV chip, a unique one-time cryptogram is produced which must then be validated for the transaction to be approved.

“The chip contains a secret unique cryptographic key, and unless that key can be extracted, it is not possible to copy or clone the chip,” ABM highlighted.

“More importantly, it should also be noted that it is not possible to build a regular magnetic stripe card from this captured data due to a magnetic stripe protection mechanism.”

Malaysia completed its migration to EMV chip cards by the end of 2004. Currently, all contactless payment cards issued in Malaysia have an EMV chip, therefore significantly reducing incidents of fraud, ABM stated.

“It is therefore not valid to cite a US example as proof that Malaysian cards are at risk,” it added.

To note, the US is still using the old signature-verified system for its credit cards.

“We would also note that Malaysia adopts a more secure payment verification method for internet transactions. To guarantee the security of each transaction, cardholders are required to enter a transaction authorization code (TAC) that is sent to their mobile phone or a card holder security device.

“In the event the card details have been fraudulently used for a transaction on an overseas website which has not implemented a secure payment verification method, the Malaysian cardholder will be protected by liability shift rules.

“These rules are imposed by the international card schemes which require overseas retailers to bear the liability of such fraudulent transactions.”

‘Maximum limit can be set’

The ABM has also clarified that card issuers may set a maximum amount for each contactless transaction as well as an appropriate cumulative limit for contactless transactions which do not entail any cardholder verification.

“Debit cardholders can also ask the card issuer to change the maximum amount for contactless transactions or switch off the contactless functionality for their debit cards,” it said in another statement. “Debit cardholders may check with their card issuers on how this can be done.

“We would like to remind all cardholders that they are responsible to safeguard their payment cards. It is the cardholder’s responsibility to notify their card issuer as soon as reasonably practicable in the event of loss/stolen or unauthorized use of their payment card.

“In the event a payment card is lost or stolen, the card issuer may excuse the cardholder from liability for unauthorised transactions made using the said card.

“This is provided the card issuer is satisfied that the cardholder has taken all reasonable precautions and diligence to prevent such loss or theft, and notified the card issuer promptly once the loss was discovered.”

Types of money-related scams

Illegal Foreign Exchange Trading Scheme

Illegal Foreign Exchange Trading Scheme refers to the buying or selling of foreign currency by an individual or company in Malaysia with any person who is not a licensed onshore bank or any person who has not obtained the approval of Bank Negara Malaysia under the Financial Services Act 2013 or Islamic Financial Services Act 2013.

This scheme involves the act of buying or borrowing foreign currencies from or selling or lending foreign currencies to a non-licensed onshore bank.

It can also be in the situation where the non-licensed onshore bank does an act that involves, is in association with, or is preparatory to, buying or borrowing foreign currencies from, or selling or lending foreign currencies to, any person outside Malaysia.

Unauthorised Withdrawals

Unauthorised Withdrawal involves the withdrawal or transfer of funds from an individual’s banking account without proper authorisation or consent by the individual.

Such incidents are normally the result of an individual knowingly, or unknowingly, divulging their personal information such as personal identification numbers (PIN) and password to fraudulent or third parties.

Based on investigations, many cases were due to customers knowingly or unknowingly divulging their personal information such as personal identification numbers (PIN) and passwords to third parties or fraudulent parties.

The transactions involved were genuine, using complainants’ account information and followed the required process. CCTV recordings had captured the complainants activating access to Internet banking at ATMs.

Most complainants were not Internet savvy and failed to understand that their own actions had led to the fraudulent withdrawal of funds from their accounts.

Forex Scams

Forex scams usually come in the form of ‘forex brokers’ soliciting investments with guaranteed high returns. Some investors were even promised up to 250 per cent returns.

According to Bank Negara’s definition, forex schemes is any individual or company that is buying and selling foreign currency without a license, or without approval from the central bank. If it’s not licensed or approved by BNM, it is best to stay away from such investment, be it forex trading or gold investment.

Ponzi Schemes

Ponzi schemes are similar to pyramid schemes.

This usually involves recruiting new members or investors.

Typically, each member is required to pay a membership fee, and the fees will be used to pay the earlier investors.

The cycle goes on until there isn’t enough money to go around anymore, and the scheme would start to crack.

Money games

Money games is run similarly to a pyramid scheme too. You are paid to recruit down lines, and you are typically promised that you will get back your investment capital within a few months and start seeing profit thereafter.

These are usually disguised as legitimate investment in forex, shares, commodities or even real estate.

Misuse of Bank Negara M’sia and senior officers’ and positions

The fraudulent use of Bank Negara Malaysia’s name, corporate logo as well as Senior Officers’ names and positions by fraudsters in illegal schemes or fraudulent activities in order to mislead members of the public.

The illegal schemes or fraudulent activities may be promoted through emails, letters, phone calls or other forms of communication.

Caller ID spoofing

Certain banks see their general line numbers being used by unauthorized parties to trick unsuspecting customers into providing their personal information with intention to cheat. The phone numbers used are exactly or very similar to the Bank’s contact number.

Based on complaints received, calls are mostly related to credit card transactions.

Examples include collection of payment overdue, verification of transaction done at a location where the customer may not reside or a transaction that is not performed, uncollected credit card, or so on.

Illegal Deposit Taking

Illegal Deposit Taking is an act of receiving, taking or accepting of deposits from members of the public that promises a repayment with interest or returns in money or money’s worth without a valid license under the Banking and Financial Institutions Act 1989 (BAFIA).

The operators of the ‘illegal deposit taking’ schemes have no valid licence to collect deposits and exploit the basic human tendency towards greed.

The operator promises very high returns on investment.

Unauthorised Use of Credit or Debit Card

Unauthorised Use of Credit or Debit Card is a transaction involving the charging of expenses/purchase of goods and services without the consent of the cardholder.

Such transactions may occur as a consequence of credit or debit cards that are lost, stolen, not received, issued on a fraudulent application, counterfeit or other fraudulent conditions as defined by the credit or debit card issuer.

Fraudsters are no longer just using SMS to elicit contact with unwary members of the public in an effort to extract personal banking information for unlawful purposes.

Illegal Internet Investment Scheme

Illegal Internet Investment Scheme is a variation of illegal deposit taking activities which employs the use of internet – such as through emails and websites – as a primary channel for interaction, communication and transaction of business engaged in fund management and investment advice without any licence.

Illegal investment schemes are those companies or individuals that are dealing in securities, trading in future contracts, and providing fund management services and investment advice and related to securities or futures without being licensed by the Securities Commission under the Capital Markets & Services Act 2007.

Protecting yourself as consumers

As scams grow increasingly sophisticated in an attempt to obtain your money or personal details, it remains crucial that consumers protect themselves by staying alert.

BNM views illegal financial schemes very seriously and will not hesitate to enforce the law against the perpetrators and promoters of such schemes.

“The wrongdoers will face the full brunt of the law, including laws administered by Bank Negara Malaysia, the Penal Code, the Interest Schemes Act 2016, the Direct Sales and Anti-Pyramid Scheme Act 1993 as well as the Anti-Money Laundering, Anti-Terrorism Financing and Proceeds of Unlawful Activities Act 2001,” it said.

Under the law, action can also be taken against investors who knowingly promote and participate in these illegal schemes.

To this end, BNM said a joint enforcement action on any financial fraud and scams will be pursued by an inter-agency initiative led by the Attorney General Chambers under the National Coordination Committee to Counter Money Laundering.

“BNM would like to caution members of the public not to participate in schemes that promise unrealistically high returns, interest rates or profits.

“Members of the public should ensure that they do not fall prey to these schemes by referring to Bank Negara Malaysia’s Financial Consumer Alert which lists companies that are neither authorised nor approved under the relevant laws and regulations administered by the Central Bank. It also provides information on the common features of illegal financial schemes.”

Financial institutions (FIs) and money services business providers have been directed by BNM to heighten their vigilance in detecting the accounts which are used by the perpetrators of financial scams and to further enhance their customer due diligence (CDD) policies and processes in identifying suspicious transactions and fund flows between bank accounts so as to prevent FIs from becoming conduits that facilitate such illegal schemes.

BNM and SC also reminded consumers to always verify the legitimacy of schemes which offer too-good-to-be-true returns or investment opportunities involving above-market rates of return and zero to low risk.

“They must obtain all relevant information before parting with their money. When in doubt, the public should check with Bank Negara Malaysia, the Securities Commission or other relevant authorities on the licensing status of the local and foreign company before depositing their money or making any investment decision.

“Members of the public are also advised to alert the authorities immediately if they come across any suspicious websites, e-mails or any information on the Internet relating to investment advice and services and deposit taking activities.”

‘Be wary when investing’

Apart from the usual advice of ‘know who you’re talking to’ and ‘avoid opening suspicious texts links and emails’, iMoney’s Lee extolled the virtue of being careful in investing your finances, following the numbers reports of credit card scam reports involving hundreds and thousands of ringgit.

“Always check and double check the sources that you are receiving your credit card information. Banks will never ask you for your credit card details over the phone, SMS or email,” he added. “If you do receive such a message or call, do not respond or reply and simply call the bank to verify.

“Only use your credit card on secure Internet connection and on secure and reputable websites or apps.”

Meanwhile, when looking out for a new investment option, Lee said key signs to look out for in terms of gauging credibility is to spot “guaranteed returns”.

“There is no guaranteed returns in investment,” he affirmed.”The second sign to look out for is the percentage of returns.

“If you are getting guaranteed returns at 15 per cent to 20 per cent — it is obviously not sustainable. If it’s too good to be true, it usually is.

“If you are unsure, always look up the company on Bank Negara or Securities Commission’s websites and see if the company is in the alert list or if it is licensed.

“Lastly, do your due diligence and try to understand how the investment works. How do they use your money to make more money? Do not invest in something you do not understand.”

To those who have fallen into such scams, Lee said it would be wise to “cut your losses and seek help from the authorities.”

“Blind trust or loyalty does not bode well in this situation,” he went on to add. “Never put all your eggs into one basket. If you are investing in something, legit or otherwise, you should never put all your money into one investment.

“If something that is out of the ordinary and not regulated by regulatory bodies, it is usually high risk. Hence, you should proceed with caution and not put too much money into the said investment.”

Top Glove’s revenue to be firmer in third quarter

June 10, 2017, Saturday

KUCHING: Top Glove Corporation Bhd’s (Top Glove) third quarter of financial year 2017 (3QFY17) revenue is expected by analysts to be firmer year on year (y-o-y) while earnings is to range from RM80 to RM85 million.

“Volume growth should stay relatively tepid, as there was no significant capacity addition in the quarter,” it said.

Recent ringgit appreciation is a potential headwind, but AffinHwang Research noted the stronger ASP increase should offset the currency impact.

For 4QFY17, the research firm expected progressively higher topline with the consolidation of two small factories TopGlove acquired recently and the commissioning of a new factory (annual capacity of three billion gloves) in June 2017.

As for 3QFY17 earnings, AffinHwang Research expected it to range from RM80 million to RM85 million, which would imply 28 to 36 per cent y-o-y earnings growth.

“Sequential earnings growth momentum may moderate, largely due to the lack of additional capacity and the higher raw material prices,” it said.

That said, the research firm noted that raw-material prices have been trending lower due to the end of the wintering season and moderating China automotive sales in May 2017, which should be positive for progressive earnings growth in 4QFY17E.

The research firm also expected firmer margins ahead on higher automation, as well as an improving product mix and increased efficiency.

Despite moderating raw-material prices, the year to date (YTD) average price of RM7.04 per kilogram (kg) for natural rubber was still above Affin Hwang’s previous assumption of RM5 to RM5.50 per kg.

Hence, AffinHwang research lowered its FY17-19E earnings per share (EPS) by two to 16 per cent after lifting its raw-material assumptions to RM6 to RM6.50 per kg.

That said, the research firm maintained its strong earnings outlook for Top Glove (EPS growth of 28 per cent y-o-y in FY18E) driven by capacity expansion and a higher nitrile contribution.

After the RHB-AMMB proposed merger, talk of more M&As in the sector has resurfaced

WITH the ongoing merger talks between RHB Bank Bhd and AMMB Holdings Bhd, coupled with Bank Negara’s push for the institutionalisation of banks, the question of which banks will be the next merger and acquisitions (M&A) candidates has resurfaced.

Going by their size as the smallest banks in the country, could Alliance Bank Malaysia Bhd and Affin Bank Bhd be next?

This is the question that is making the rounds in banking circles.

According to banking analysts, there is a possibility of Alliance merging with Affin as they are very small banks.

“They will eventually feel the pressure to merge, given the market forces,” says one analyst.

Also, Affin is controlled by the Armed Forces Fund Board (LTAT), which is known to want to cast its net wider in the banking field.

“Additionally, Affin’s recent financial results demonstrate that its transformation plan is working out, while Alliance is a well-managed outfit and is doing well in its niche segment of small and medium enterprises. It makes sense for both entities to merge,” he adds.

However, recall, three years ago, Affin’s parent Affin Holdings Bhd had acquired Hwang-DBS Investment Bhd for RM1.36bil, edging out AMMB Holdings from the deal.

While the acquisition has given Affin a platform to carve its own niche with a stronger market presence in investment banking, some reckon that the return on the investment is still at the low end.

Then, there is the factor of Bank of East Asia Ltd (BEA), which is Affin’s second-largest shareholder with a 23.5% block.

Any M&A involving Affin would have to get the nod from the Hong Kong-listed BEA, where tycoon Tan Sri Quek Leng Chan has a strategic 14% stake.

In Alliance’s case, there were some changes in the shareholding structure of Alliance Financial Group Bhd (AFG)last year – the bank’s parent company – which suggested that there could be M&A-related developments for the bank.

Via Vertical Theme, Temasek effectively has a 14.2% indirect stake in the financial group and thought to have management control of AFG.

It is to be noted that yesterday, Bank Negara approved AFG’s earlier proposed reorganisation, which included Alliance Bank taking over the listing status of AFG.

Meanwhile, industry observers reckon that the three individuals, who are well-known in corporate circles, are parties friendly to Temasek.

Beng Seng, who owns the Four Seasons and Hilton hotels in Singapore had previously joined hands with Temasek to buy up properties in London.

Nevertheless, owning stakes in banks has become all the more challenging, given that financial institutions are making frequent capital calls to boost their capital needs in order to meet international regulatory standards.

Of the groups, Maybank, thanks to its strong capital levels due to its recent dividend reinvestment plan, has the financial war chest to initiate an M&A.

Public Bank and HLB remain the only two that have yet to court or be courted in recent times. In the case of Public Bank, its high valuations make it difficult for it to be swallowed up. Based on its last traded price of RM20.38 per share, Public Bank is trading at a massive 2.29 times price-to-book.

“It’s going to be difficult for any one bank to swallow Public Bank at its current valuations. One scenario could be to break down the units within the bank just like what happened between Affin and Hwang-DBS and sell these one by one.”

However, given its financial strength, Public Bank is likely to be the predator rather than the prey.

As for HLB, it last courted and bought EON Bank for RM5.1bil in 2010 after a long shareholder battle, valuing the deal at 1.4 times price-to-book.

Move to institutionalise

It is no secret that Bank Negara, especially in recent years, has sought to limit the ownership of individuals in local banks.

“As banks become bigger, there would be greater demand for capital that may not be met by individual owners... institutionalising the shareholdings of banks is seen as the right way to go, as is the case of mature markets like Singapore and Hong Kong,” says a banker.

Under Bank Negara’s Securities Industry (Reporting of Substantial Shareholding) Regulation 1998, individuals are not allowed to own more than a 10% stake each in a financial institution.In the case that happens, they are required to get approval from the central bank.

However, there is an exception or what is termed as the “grandfather rule” in the banking sector.

This is the unwritten rule that was first applied to the three seasoned bankers of Malaysia – Tan Sri Azman Hashim of AMMB Holdings, Quek of Hong Leong Financial Group Bhd and Public Bank’s Tan Sri Teh Hong Piow.

The individuals are allowed to hold more than a 10% stake in a bank, as their personal stakes in the respective banks were acquired before the Banking and Financial Institution Act 1989 or Bafia – the Financial Services Act 2013’s predecessor – was implemented in 1989.

In the case of the RHB-AMMB merger, if it materialises, analysts believe that Azman’s current 12.97% stake in AMMB will be diluted to about 6% in the enlarged entity, assuming he stays on as a shareholder.

Meanwhile, in terms of domestic institutions owning stakes in local banks, the Employees Provident Fund currently has a large stake of 40.7% in RHB Bank and is a substantial shareholder in all the other banks in Malaysia.

Permodalan Nasional Bhd, the country’s largest fund manager, is a controlling shareholder in Maybank with 48%, while LTAT owns a 35.4% direct stake in Affin Holdings.

Notably, Affin Holdings is working on a restructuring plan to transfer its listing status to Affin Bank.

Other government-linked investment funds, including the Retirement Fund Inc or KWAP, also have a presence in local banks.

Valuation issues

It is unlikely that banking mergers will take place at historical valuations of the past.

In a recent note to clients, CIMB Research says it believes that the price-to-book value for future banking M&As will be significantly lower than the historical average, given the decline in banks’ return on equity ratios arising from higher capital requirements under new financial regulations and thinning net interest margins.

Under the RHB-AMMB merger, RHB has proposed an all-share deal in order to acquire the assets and liabilities of AMMB at a potential pricing based on AMMB’s book value of one time. Gone are the days when banking transactions were done at a book value of more than three times.

The norm is probably closer to 1.4 times book value now. A year ago, most financial institutions here were trading at less than their book values.

Elsewhere in Europe, banks are still trading at less than book values, making Asean banks, which have seen their share prices rise this year, unattractive in terms of valuations.

As Europe’s economy is recovering, it is unlikely that foreigners would fork out hefty premiums for a stake in a bank that is based in the Asean region and which valuations are relatively higher when they can do the same for less in Europe.

Taking this into consideration, the only mergers in the local banking scene, going forward, are likely to be between domestic players. And that is what the central bank would like to see.

The question now is how long will the market have to wait before another merger comes into play. That could reignite an M&A theme in the banking industry – something that the local stock market can very well do with.

Read more at http://www.thestar.com.my/business/business-news/2017/06/10/which-banks-are-next/#RmmWIhuqLMxKcqoD.99

Value of an Asset

From The Essays of Warren Buffett: “In Theory of Investment Value, written over 50 years ago, John Burr Williams set forth the equation for value, which we condense here: The value of any stock, bond or business today is determined by the cash inflows and outflows—discounted at an appropriate interest rate—that can be expected to occur during the lifetime of the asset.”

Mr. Market is there to be taken advantage of. Do not be the sucker instead. BFS;STS.

Always buy a lot when the price is low.

Never buy when the stock is overpriced.

It is alright to buy when the selected stock is at a fair price.

Phasing in or dollar cost averaging is safe for such stocks during a downtrend, unless the price is still obviously too high.

Do not time the market for such or any stocks.

By keeping to the above strategy, the returns will be delivered through the growth of the company's business.

So, when do you sell the stock? Almost never, as long as the fundamentals remain sound and the future prospects intact.

The downside risk is protected through only buying when the price is low or fairly priced.

Tactical dynamic asset allocation or rebalancing based on valuation can be employed but this sounds easier than is practical, except in extreme market situations.

Sell urgently when the company business fundamental has deteriorated irreversibly.

You may also wish to sell should the growth of the company has obviously slowed and you can reinvest into another company with greater growth potential of similar quality. However, unlike point 16, you can do so leisurely.

In conclusion, a critical key to successful investing is in your stock picking ability.

My Philosophy and Strategy

DOCUMENTRY- WARREN BUFFETT THE WORLDS GREATEST MONEY MAKER

Peter Lynch

11 Lessons From Peter Lynch

Peter Lynch taught me:

1. Behind every stock is a company. Find out what it’s doing.2. Never invest in any idea you can’t illustrate with a crayon.3. Over the short term, there may be no correlation between the success of a company’s operations and the success of its stock. Over the long term, there’s a 100% correlation.4. Buying stocks without studying the companies is the same as playing poker – and never looking at your cards.5. Time is on your side when you own shares of superior companies.6. Owning stock is like having children. Don’t get involved with more than you can handle.7. When the insiders are buying, it’s a good sign.8. Unless you’re a short seller, it never pays to be pessimistic.9. A stock market decline is as predictable as a January blizzard in Colorado. If you’re prepared, it can’t hurt you.10. Everyone has the brainpower to make money in stocks. Not everyone has the stomach.11. Nobody can predict interest rates, the future direction of the economy, or the stock market. Dismiss all such forecasts and concentrate on what’s actually happening to the companies in which you’ve invested.

Lynch’s advice had a profound effect on my stock market approach. He taught me that investment success isn’t the result of developing the right macro-economic view or deciding when to jump in or out of the market. Success is about researching companies to identify those that are likely to report positive surprises.

Think of your physical, mental and social well-being. Money may not buy happiness.

What is Risk?

The major RISK facing you is the possibility of not reaching your long-term investment goal through the growth of your funds in real terms. And the greatest enemy of reaching those goals is INFLATION. Nothing is safe from inflation. Short-term price volatility is NOT risk for investors who have time horizons 5, 10, 15 or 30 years away. Volatility is the friend of the long term investor. The most important friends of your investment goal are COMPOUNDING and TIME.

Life Cycle of A Successful Company

Capital Expenditure

A great company with a Durable Competitive Advantage will have a ratio of Capital Expenditures to Net Income of less than 25%. Less is better.

Capital Expenditures are expenses on:- fixed assets such as equipment, property, or industrial buildings- fixing problems with an asset- preparing an asset to be used in business- restoring property- starting new businesses

A good company will have a ratio of Capital Expenditures to Net Income of less than 50%.

A great company with a Durable Competitive Advantage will have a ratio of less than 25%.

The best stock investment strategy

Keep it simple. Keep it safe (make money with less risk taking). You don't need to pick the best stock or even the best stock funds to do well, if you have an investment strategy that keeps you out of trouble.

Benjamin Graham's 113 Wise Words

The true investor scarcely ever is forced to sell his shares, and at all times he is free to disregard the current price quotation. He need pay attention to it and act upon it only to the extent that it suits his book, and no more. Thus the investor who permits himself to be stampeded or unduly worried by unjustified market declines in his holdings is perversely transforming his basic advantage into a basic disadvantage. That man would be better off if his stocks had no market quotation at all, for he would then be spared the mental anguish caused him by other persons' mistakes of judgement."

Philip Fisher's Wise Words

"The refusal to sell at a loss, while completely natural and normal, is probably one of the most dangerous in which we can indulge ourselves in the entire investment process.

More money has probably been lost by investors holding a stock they really did not want until they could 'at least come out even' than from any other single reason. If to these actual losses are added the profits that might have been made through the proper reinvestment of these funds if such reinvestment had been made when the mistake was first realized, the cost of self-indulgence becomes truly tremendous."

(Common Stocks and Uncommon Profits)

Visualization Video for a New Life

All equity security investments present a risk of loss of capital

Investment performance is not guaranteed and future returns may differ from past returns. As investment conditions change over time, past returns should not be used to predict future returns. The results of your investing will be affected by a number of factors, including the performance of the investment markets in which you invest.

The Ultimate Hold-versus-Sell Test

Here is the overriding primary test, followed by observations on why it is so critically important:

Knowing all that you now know and expect about the company and its stock (not what you originally believed or hoped at time of purchase), and assuming that you had available capital, and assuming that it would not cause a portfolio imbalance to do so, would you buy this stock today, at today's price?

No equivocation. Yes or no?

Answers such as maybe or probably are not acceptable since they are ways of dodging the issue. No investor probably buys a stock; they either place an order or do not.

Here is the implication of your answer to that critical test: if you did not answer with a clear affirmative, you should sell; only if you said a strong yes, are you justified to hold.

Some thoughts on Analysing Stocks (KISS)

Ideally a stock you plan to purchase should have all of the following charateristics:

• A rising trend of earnings dividends and book value per share.• A balance sheet with less debt than other companies in its particular industry.• A P/E ratio no higher than average.• A dividend yield that suits your particular needs.• A below-average dividend pay-out ratio.• A history of earnings and dividends not pockmarked by erratic ups and downs.• Companies whose ROE is 15 or better.• A ratio of price to cash flow (P/CF) that is not too high when compared to other stocks in the same industry.

Benjamin Graham

"To achieve satisfactory investment results is easier than most people realise; to achieve superior results is harder than it looks."

Sell the losers, let the winners run.

Losers refer NOT to those stocks with the depressed prices but to those whose revenues and earnings aren't capable of growing adequately. Weed out these losers and reinvest the cash into other stocks with better revenues and earnings potential for higher returns.

Margin of Safety Concept: Stocks should be bought like groceries, not like perfume

The high CAGR in the early years of the investing period, due to buying at a discount, tended to decline and approach that of the intrinsic EPS GR of the companies over a longer investment time-frame.

Chapter 20 - “Margin of Safety” as the Central Concept of Investment

A single quote by Graham on page 516 struck me:

Observation over many years has taught us that the chief losses to investors come from the purchase of low-quality securities at times of favorable business conditions.

Basically, Graham is saying that most stock investors lose money because they invest in companies that seem good at a particular point in time, but are lacking the fundamentals of a long-lasting stable company.

This seems obvious on the surface, but it’s actually a great argument for thinking more carefully about your individual stock investments.If most of your losses come from buying companies that seem healthy but really aren’t, isn’t that a profound argument for carefully studying any company you might invest in?

Market Fluctuations of Investor's Portfolio

Note carefully what Graham is saying here. It is not just possible, but probable, that most of the stocks you own will gain at least 50% from their lowest price and lose at least 33%("equivalent one-third") from their highest price -regardless of which stocks you own or whether the market as a whole goes up or down.If you can't live with that - or you think your portfolio is somehow magically exempt from it - then you are not yet entitled to call yourself an investor.